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The Profitable Impact of Corporate Social Responsibility

This chapter delves into how corporate social responsibility (CSR) can enhance financial performance. It covers the role of stakeholders, non-market forces, and the limitations of the Invisible Hand concept. The text highlights the benefits of CSR, risk management strategies, waste reduction programs, and regulatory protection. Additionally, it discusses the correlation between good CSR practices and superior financial outcomes, supported by studies and data analysis. The chapter underscores the positive relationship between environmental and social performance and financial metrics, emphasizing the financial rewards of responsible business practices.

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The Profitable Impact of Corporate Social Responsibility

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  1. When Principles Pay-CSR & the Bottom Line-Geoffrey Heal Chapter 1. IntroductionChapter 2. Social Environmental Performance January 29,2013 Chull-Young Lee SEN Winter School

  2. Adam Smith (1776) : Invisible HandMilton Friedman(1970) : Profit Maximization History

  3. Corporate Environments • Stakeholders: Shareholders, Employees, Customers, Banks, Suppliers, Community, Society, Government • Non-Market Forces: Regulations, Legal System, Regulatory Bodies, NGOs, Capital Market, SRI

  4. Limitations of Invisible Hand:Market Failures E nvironment: External Costs S ocial: Justice & Fairness G overnance: Shareholders

  5. Environment: External Costs • Total Cost(Social Cost)= Private Cost + External Cost

  6. Social : Justice & Fairness • Distribution of Income • Human Rights

  7. G overnance: Shareholders • Primacy: Profits vs Shareholders • Conflict of Interest: Shareholders & Management

  8. CSR • Value Alignment: Corporate’s values vs Societal values • Corporate Strategy: Long-term Growth & Development

  9. Benefits of CSR • Reduction of Conflicts : Corporation vs Society

  10. Risk Management : bad press, NGO actions, consumer boycott, law suits

  11. Waste Reduction : - BP’s greenhouse reduction program: $630M in savings and extra revenue • Du Pont’s chemical reduction program: Sales of clean-up services generated $1B revenue/yr • Dow chemical's energy saving projects(1981-1993): 204% return on investment

  12. Regulatory Protection • Brand Equity • Employee Productivity • Cost of Capital

  13. What the Data Tell Us • Corporate Profits • Stock Price • Market to Book Ratio: Stock Market Valuation Book Value of Co’s Assets “Good CSR is positively correlated with superior financial performance.” =

  14. Pollution & Stock Price • Hamilton’s 1995 Study: Based on U.S. EPA’s TRI(Toxics Release Inventory) “Average impact of TRI’s annual data releasing firms was $4.1M of stock-market values down.” • Dasgupa, Laplate & Mamingi’s 2001 Study: In Argentina, Chile, Mexico & Philippines, “Inferior performance of a firm(filed of a complaint to a government authority) dropped 5-15% stock price drop.” “ Superior performance of a firm (meeting expected standards) raised 20% stock price up.” • Korean’s 2004 Study: “A firm listed on Monthly Violation Report by Ministry of Environment experienced average 9.7% stock price drop.”

  15. Environmental & Financial Performance • Dowell, Hart & Yeung(DHY) Study: S&P 500, U.S. “Shows positive correlation between environmental performance and Market-to-Book ratio.” • Social Performance and Market-to-Book • Research by Heal, Fisman & Nair 2008: “Correlation is high especially among heavy advertisers, ie, when corporate image and brand equity are important.” • “Cause Related Marketing is effective.” • EX: Coca Cola, Evian, BT Group, Bono’s Red

  16. SRI : Investment Returns * Domini Social Index (1991-2001)DSI S&P500 5 Years 20% 18.4% 10 Years 18.9% 17.4% * Calpers’ Engagement with 42 Companies(1987 – 1992) : Outperformed 41% over S&P500 * Pax World Balanced Fund ($1.1B) : 17th among 293 mutual funds (5 Years: 1996-2001) * Korean Stock Market KRXSRI Index KRX SRIKOSPI 2009. 1. 2 – 11. 30 41.8% 35.5% DJSI Korea DJSI KoreaKOSPI 2006. 1. 1 – 2010. 4. 5 37.8% 24.7% ARK(Value Investing+SRI) ARK KOSPI 2003. 7. 16 – 2010. 5. 4 301.8% 139.89%

  17. Appendix: Blended Value Map Social Financial Blended Value Spectrum • Social Entrepreneurship • Strategic • Philanthropy Corporate Social Responsibility • Global Poverty, • Emerging Markets • & • Int’l Development Environmental Sustainability Socially Responsible Investment Non-Profit Management & Governance • Social Capital Market Sustainable Development

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